Monday, December 3, 2012

Mortgage Rates: Who and What to Believe?

Mortgage rates will
open higher this morning based on early trading action for mortgage-backed
securities and indications from pre-market activity in the equity markets. But
are they likely to stay higher? I suppose it depends on who you choose to
listen to and what other news you find meaningful.

Early trading activity is focused on Secretary of the Treasury, Timothy
Geithner’s statements over the weekend that Republicans would ultimately accept
the Administration’s plan for higher taxes on top earners (and all investors).

This would enable the country to resolve the so-called “fiscal cliff.” The
trouble with focusing on these statements by Secretary Geithner is that they are
completely contradicted by statements made by the leaders of the Republican
Party in Congress. I do tend to agree that Republicans in the House of
Representatives will ultimately decide to accept higher rates on top
earners, but I don’t think it will happen soon or without specific spending cuts
put forth by the president.

In real economic news today there are several important developments.

First,
China reported the first growth in its manufacturing sector in over a year.
This is a sign that worldwide demand is beginning to increase, which will likely
show up in US data as well.

We will find out at 10 AM ET when the monthly ISM
Index of US manufacturing activity is released. Expectations are for a slight
drop from last month’s levels, but this could simply be a function of the
after-effects of Hurricane Sandy. An upward surprise could cause rates to rise
even more.

Also at 10 AM this morning will be the monthly construction spending report.
Much like with the ISM report the forecast is for a slight decline. But again a
surprise higher could fuel a spike in mortgage rates as it would signal stronger
economic activity than anticipated.

This week is crucial for mortgage rates and most of the potential pressure is
for higher rates.

If the data on manufacturing, services and employment this
week come in as expected we will buy a little more time with all-time low mortgage rates. If however we get a surprise to the high side a sudden spike in
rates could occur. It really boils down to whether Hurricane Sandy had the
impact on the economy that the experts believe it had. We’ll know very
soon.

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